Connecticut’s LREC/ZREC Program, a Competitive Reverse Auction Model for 15-year REC Contracts

By Dana Hall, Esq.

In April of 2012, the State of Connecticut Public Utilities Regulatory Authority ("PURA") announced a new procurement program for renewable technologies using a competitive reverse auction model. Connecticut’s ZREC (zero-emissions) and LREC (low-emissions) program is a six-year solicitation for 15-year REC contracts, with over one billion dollars of funding to be administered by the state’s two largest electric utilities – Connecticut Light & Power ("CL&P") and United Illuminating ("UI").

While the budget for the program is statutorily established, a competitive market drives the REC price through a reverse auction that awards the bidding developers who require the least amount of subsidy with 15-year REC contracts. The result has been REC prices that are substantially lower than neighboring statutory alternative compliance payments or REC prices, but exactly the price each individual project needs to be economically viable. The initial procurement has resulted in ninety-seven executed contracts for over 31 MW of new low and zero emission capacity and over $7.5 million of REC value. [1]

LREC eligible technologies (including fuel cells and biomass) are those that have emissions below established criteria, [2] and ZREC eligible technologies (solar, wind, small hydro) are those that emit no pollutants. To be eligible for the program, LREC projects may not be larger than 2,000 kW, and ZREC projects are broken into three tiers:

• Small tier ZREC projects are those up to 100 kW
• Medium tier ZREC projects are over 100 kW, but under than 250 kW
• Large tier ZREC projects are those between 250 kW – 1,000 kW

The Energy Act imposes price caps of $350 per ZREC and $200 per LREC, and both LRECs and ZRECs must come from Connecticut generation projects located behind customer meters, in operation on or after July 1, 2011.

The program budget exceeding $1 billion is allocated with $300 million to be spent on LRECs over five years, and $720 million to be spent on ZRECs over six years. Each year, UI and CL&P will solicit up to $120 million worth of ZREC contracts ($8 million per year for 15 years) and up to $60 million of LREC contracts ($4 million per year for 15 years). Because CL&P serves approximately four times the distribution load that UI serves, PURA allocated the REC procurement obligation roughly 80% to CL&P and 20% to UI. The annual LREC target is roughly $3.2 million for CL&P and $0.8 million for UI, and the annual ZREC target is roughly $6.4 million for CL&P and $1.6 million for UI. The ZREC program has three tiers, allocating the $8 million per year in equal thirds among the three size classes.

The first solicitation of June 2012 sought proposals for LREC projects, and for the Medium and Large ZREC tiers, and was competitively bid with executed contracts filed for PURA approval in October 2012. The Small ZREC tier was reserved for a later RFP and will not be competitively bid, as per program parameters. Instead, each year the Small ZREC tier will receive a PURA decreed REC offer price equivalent to the weighted average accepted bid price in the most recent solicitation for the Medium ZREC tier.

According to UI Company Interrogatories filed in October, 2012, of the over 400 bids received, a few were disqualified because they had either material errors or omissions in the bidder response form, failed to include a bid price, or failed to submit the form as a working excel file. Once accepted, a small number of bids were withdrawn. Offered explanations for withdrawals of accepted bids included reasons such as the customer of record couldn’t commit to remain at the location for 15 years, the customer of record was not prepared to execute a PPA with the bidder, a bidder discovered that its proposed project could not be built as proposed, and a bidder determining that its project would not meet statutory emission requirements.

Interestingly, despite reports about bumps in the road for the ZREC program which claim that winning bids were withdrawn prior to contract execution because they were speculative in nature and failed to secure financing, a failure to secure financing was not amongst the explanations offered in the interrogatories. Even if it were true that many developers could not secure financing to meet contractual obligations, the fact that the program uses a 90-day standby period allowing the next most competitive bids to make performance assurance and execute contracts, demonstrates the success of the program. Moreover, the entire structure of the program is based on the use of 15-year fixed REC contracts, offering a secure revenue stream designed to attract financiers.

On October 5 and 10, 2012, UI and CL&P respectively filed 97 executed LREC and ZREC contracts for PURA’s review and approval (19 solar and 2 fuel cell from UI and 68 solar and 8 fuel cell from CL&P). The winning bids offered REC prices well below the statutorily imposed caps of $350 per ZREC and $200 per LREC. CL&P's weighted average bid prices were $138 for Large ZRECs, $149 for Medium ZRECs and $59 for LRECs. UI's weighted average bid prices were $117 for Large ZRECs, $135 for Medium ZRECs and $51 for LRECs.

The table below details the bids submitted to PURA by UI. In all, 72 projects with 25.4 MW of total capacity were submitted to UI, and 21 bids with 6.2 MW of total capacity were accepted by UI.

In their interrogatory filings, UI reported that their solicitation for LRECs resulted in $311,640/yr of its $800,000/yr budget being unspent due to the large size of the next bid in the bid stack. [3] In other words, the bids were ordered by ascending REC price, and the capacity of the next project in the bid stack would have exceeded the remaining funds.

Under the Solicitation Plan, PURA and the companies will to revisit the program after the first year to evaluate the market response to solicitations for each size class, and determine whether it is appropriate to change the funding allocations, particularly amongst the ZREC tiers. This process is ongoing in the PURA docket 11-12-06, and is likely to address the bid stack issue in the LREC procurement.

Based on the current group of contracts Medium tier projects filed with PURA, UI projects a Small ZREC tariff rate of $148.89 per REC. As of this posting, PURA has not released the Small ZREC tariff rate per REC. UI and CL&P will be holding a Small ZREC Tariff Informational Meeting, focused on the “nuts and bolts” of submitting applications and interconnecting small zero-emission renewable energy systems, to be held at the Northeast Utilities offices at 107 Selden Street in Berlin, CT on November 27, 2012.  The companies also plan to post a Small ZREC Tariff Question and Answer document on their respective websites prior to the Informational Meeting.  Please visit CL&P (click on "Going Green" and then click on "Renewable Energy Credits")  or UI for more information on the Small ZREC Tariff.



1. CL&P Procurement Plan for the Purchase of LRECs and ZRECs (Exhibit A) Compliance Filing 10/10/2012, Docket No. 11-12-06, Order No. 5.; UI’s LREC/ZREC RFP Results, 9/27/2012; and UI's Compliance Filing 10/5/2012, Docket No. 11-12-06, Order No. 5. 

2. Emissions of no more than 0.07 pounds per MWh of nitrogen oxides, 0.10 pounds per MWh of carbon monoxide, 0.02 pounds per MWh of volatile organic compounds, and one grain per 100 standard cubic feet. (Solicitation Plan, April 4, 2012, p. 4).

3. UI raised this concern in its response to Interrogatory No. RA-4 in Docket No. 11-12-06.



 
Dana Hall, Attorney at Law offers legal and regulatory support services for a range of clean energy clientele. Serving property owners and energy service companies, Ms. Hall uses her experience as an energy policy analyst and educator to add value to her clients' business operations.  Additional information about Dana Hall, Attorney at Law can be found at danahalllaw.com.